Some Perspective on Yahoo, Microsoft, Icahn & Google

On Tuesday, Dennis Berman of the Wall Street Journal wrote a wonderfully insightful and succinct assessment of the latest chapter of the Yahoo/Microsoft/Carl Icahn/Steve Ballmer/Google dance.

In the piece, entitled "Why Yahoo Should Strike as Iron Is Hot," he noted, in closing,

"But the question for Yahoo's board shouldn't be whether it can increase its cash flow. It is whether it can improve its stock price, over a reasonable period of time, greater than a Microsoft offer. A growing chorus of shareholders think it can't.

So, the basics: AOL can't succeed at being Yahoo; Yahoo can't succeed at being Google; Microsoft can't succeed at being any of them. Nonetheless, Microsoft has the fantasy it wants to be Google. How could Yahoo's board do anything but take a decent offer and bank it?"

Berman makes a key point here. Really, despite the much longer verbiage preceding these final paragraphs, the only crucial points in his article.

Yahoo is no longer an investment equity. Neither, really, is Microsoft. Forget AOL/TimeWarner entirely.

With Carl Icahn prowling about to encourage the Yahoo-Microsoft deal, you know that this is now just about short-term speculative gains. Not long-term strategy.

I haven't owned Microsoft in over a decade, or Yahoo since the 1990s. Now, both have simply become opportunities for arbitrage as Icahn maneuvers to recover the value Jerry Yang kicked away.

As the nearby Yahoo-sourced price chart of the past week illustrates, Yahoo's value has held up nicely due to continued betting that something will eventually happen to realize some of the premium of the original Microsoft offer.

But don't bet on any sort of long-term potential for consistently superior total returns from either Microsoft or Yahoo, in any sort of combination, or absent it.

Yahoo's fundamental strategy failed long ago, in terms of consistently superior total return performance. Microsoft's performance stalled before that.

I remain convinced that the only way Microsoft can re-ignite consistently superior return performance is to split itself up into an operating system business, desktop applications, online, and gaming. Then the gaming business can take off and reward shareholders for a few years.

But for now, all of this fuss is about betting that by owning Yahoo, you can benefit from Carl Icahn's ability to recover some value for its shareholders while ringing down the final curtain on Yang.